Detecting envelope wages with e-billing information

Abstract

We use information from the electronic billing system to estimate the underreporting of income of private sector employees. We follow an expenditure-based methodology using the consumption of public and private sector employees for similar levels of reported income. We find that private sector employees underreport between 7 and 9% of their income in Ecuador. The size of the underreporting gap is negatively correlated with the number of employees at the firm, consistent with different risks and administrative costs of ‘envelope wages’ in small versus large firms.